2ND-QUARTER GROWTH REVISED SHARPLY HIGHER

Friday

The nation’s economic output grew at a much faster rate in the second quarter than originally estimated, buoyed by an increase in exports.

Gross domestic product, a broad measure of goods and services produced across the economy, grew in the second quarter at an annualized rate of 2.5 percent in April through June, the Commerce Department reported Thursday. The government initially estimated GDP at 1.7 percent.

The growth rate is still far lower than what the country needs to recover the ground lost during the recent recession anytime soon. The long-term average growth rate for the economy is more than 3 percent, and the economy needs above-trend growth to make up for sharp losses from the downturn.

Even so, the upward revision was welcome news, particularly alongside another report Thursday showing that jobless claims were falling. The improving economy is also likely to factor into the Federal Reserve’s decision to pull back from its stimulus efforts, which some analysts expect as soon as September.

Expansion in the second quarter — faster than the annualized growth rate in the first quarter of 1.1 percent — was driven by gains in consumer spending, exports, private inventory investment, nonresidential fixed investment and residential fixed investment. Residential fixed investment, which reflects the sharp rebound in housing construction, has been one of the brightest spots in the economy so far this year, growing at an annualized rate of 12.9 percent in the second quarter and 12.5 percent in the first.

The shrinking government continues to drag on the economy. State and local government spending has declined almost every quarter for the last four years, and federal government spending fell during about half of those quarters. The upward revision to gross domestic product last quarter primarily reflected the fact that exports turned out to be higher than initially estimated and imports were actually slightly lower.

“The good news is that the economy accelerated in the second quarter to a degree that was even better than expected,” said James M. Baird, chief investment officer for Plante Moran Financial Advisors. “However, it’s also clear that wary consumers and businesses haven’t fully bought in to an imminent return to more robust growth and will not go all in on spending and investment.”

The revisions seemed to further convince economists that the Federal Reserve will begin tapering its large-scale asset purchases at its September meeting. Fed Chairman Ben S. Bernanke has previously said the central bank would slow these stimulus measures this year, but did not specify when.

The output revisions “should give Fed officials more confidence that the recovery is gathering steam,” Paul Ashworth, chief U.S. economist for Capital Economics, wrote in a client note. Still, he said, “it’s no certainty, and August’s nonfarm payroll figures will be watched closely,” referring to the next jobs snapshot, due out on Sept. 6.

Economists noted that the upward revision for second-quarter GDP addressed one of the puzzles in the data this year, about why hiring seemed to be picking up when output growth remained extraordinarily slow. The divergence between the two indicators did not seem sustainable, and some worried that a major slowdown in employment growth might be on the horizon.

Thursday’s report “adds to the likelihood that the apparent disconnect between employment and GDP will be closed with GDP moving up rather than employment down,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics. “Some, but not all, of the disconnect was revised away today.”

Private forecasters seem to be expecting third-quarter growth in the 2 percent range, and did not seem to think that the upwardly revised second quarter brightened the growth picture.

“We continue to judge that a significant ramp up in growth is unlikely, particularly given the ongoing effects of fiscal tightening,” said Peter Newland, an economist at Barclays. Congress’ across-the-board automatic spending cuts have been weighing on the economy, and further cuts may come when the Senate and House convene in September. A fight over the debt ceiling also looms.